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Chinese laws and regulations: Is hiring a freelancer legal in China?

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Chinese laws and regulations Is hiring a freelancer legal in China

Questions & Answers

Q: More and more websites (like oDesk.com, Elance.com Freelancer.com) in English and Chinese are connecting international business people with Chinese freelancers to project work on a part time and sometimes full time basis. What do the Chinese laws and regulations say about this?

A: Technically, this transaction is not governed by Chinese Labor law and there can’t be a legally binding labor contract in place because the “employer” is not a legally registered Chinese entity. However, Chinese tax law does apply.

It’s not forbidden for a Chinese person in China to work for overseas entity as a freelancer, as long as he/she complies with Chinese laws and regulations, especially the tax law. Income tax needs to be paid and is it the responsibility of the individual freelancer to pay it.
The PRC individual income tax laws clarify how much income tax would need to be paid:

For tax on remuneration for labor services (usually for freelance job) a flat tax rate of 20% is applicable.

There is a different structure for the tax on salary (usually for full-time, long term jobs paid by a formal employer). In those cases a progressive tax rate is in place. 3 to 45 percent is applied depending on the income bracket. Income tax is not applied to the salaries below 3,500 RMB/month.

At the moment, it’s not easy for the China tax man to know how much a freelancer is actually making and where the money came from. However, it’s required by the law that any individual whose income is more than 120,000 per year should report their income to government, regardless of the source.

3 legal services foreign companies in China should not overlook!

To date, there are few instances of freelancers getting in trouble for failure to pay full income tax. In the not too distant future, PRC government will start to crack down. But for now, the laws remain unenforced. BUT there are cases where freelancers and their “employers” are getting into trouble if they perform a service that should only be performed by a licensed entity in China.

Here is one common example:

Dangers of hiring a freelance QC inspector

Chinese laws and regulations Dangers of hiring a freelance QC inspector

Some foreigners hire freelance Chinese to do product inspection. The freelancer goes to the foreigner’s supplier in China and conducts an audit of the factory or does a product inspection. After the visit a report is provided to the foreign customer. Actually, this field is highly regulated and only AQSIQ licensed firms with AQSIQ registered auditors/inspectors should be doing inspection/auditing work.

The danger for the foreign customer is as follows:

  1. If the Chinese supplier wants to remove the inspector because that inspector is finding a lot of defects. The suppliers can secretly turn the inspector into AQSIQ. So suddenly, the overseas buyers find themselves without eyes and ears at the factory.
  2. If the freelance inspector does a poor job and doesn’t find defects or reviews the wrong shipment… the overseas company has little recourse.
  3. Most overseas company’s try to get the lowest price freelancer out there. Yet they ask this freelancer to inspect product which may have a significant value. This situation is ripe for bribery.

Say you pay the freelancer 100 bucks to visit a factory and give the yes/no on a 100,000 USD order. Factory knows they have defects, but they get paid from you when the goods ship, so they give the freelancer 400 USD to turn a blind eye and send you are report that says the order “100% OK”. Since there are no ramifications for the freelancer (keep in mind you can’t sue him because you don’t have a legally binding contract with him under PRC law), they are highly likely to go to the dark side and accept the bribe and you get a load of junk.

Additional resources:

www.SupplierBlacklist.com is a great site if you want to see the problems international buyers have when dealing with freelancers, agents and factories in China. Here is a case study of a Canadian company, published on the CSIC blog.

Legal system in Hong Kong and the P.R.C.

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Legal system in Hong Kong and the P.R.C.

“One China, two systems”

In the United States, we tend to take for granted the Constitution’s Full Faith and Credit Clause. The concept is simple: any valid judgment issued by one state is fully enforceable in another state. Unfortunately, international civil litigation is not that simple and as a result the designated jurisdiction in your contract may affect the success of your claim.

Under certain circumstances the P.R.C. permits parties to apply foreign contract law when enforcing the terms of business agreements. But generally, difficulties arise when attempting to enforce foreign court judgments in the P.R.C. However, Hong Kong judgments are an outlying exception.

In 2006, China and Hong Kong implemented a special reciprocity arrangement for enforcing monetary judgments in commercial disputes. The legal system in Hong Kong is based on English common law  and has relatively sophisticated courts. What this means is that Hong Kong more closely resembles both the British and American systems of jurisprudence. If jurisdiction can be obtained, litigation in Hong Kong may be viable and advantageous option for dispute resolution. To ensure protection under the Hong Kong S.A.R. (Special Administrative Region) you must first establish qualified jurisdiction and understand the steps of enforcement.

Only some categories of agreements may apply Hong Kong law. Actions brought on disputes arising from the performance of contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures or Chinese-foreign cooperative exploration and development of P.R.C. natural resources exclusively fall under the jurisdiction of the People’s Courts of the P.R.C.

In addition to the substantive terms of your agreements (e.g., defining the product, payment schedule, quality assurance) the handling of claims and disputes is just as important. Arguably, the most important contractual term in your agreement is the exclusive choice of court provision. You MUST expressly (in writing) agree to designate either the Mainland or a Hong Kong Court to have exclusive jurisdiction for dispute resolution.

To quote the H.K.S.A.R.’s press release on the Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters, “the Arrangement is only applicable to money judgments on disputes arising from commercial contracts where the parties concerned, on the basis of freedom of contract, have made an agreement in writing in which a court of the Mainland or court of the H.K.S.A.R. is expressly designated as the court to have sole jurisdiction for resolving the dispute concerned.”

“Should I designate Hong Kong or the P.R.C. as my choice of jurisdiction?”

Legal system in Hong Kong Should I designate Hong Kong or the P.R.C. as my choice of jurisdiction

At first glance, applying Hong Kong law may seem like the more attractive option. The reason being that most Western businesses are more familiar with basic legal terms of the common law system (for example, common law contracts require offer, acceptance and consideration; whereas P.R.C. may only require mutual assent). But difficulties may arise when your supplier or associate operates only within the Mainland.

As mentioned above, you may be able to secure a money judgment in Hong Kong and enforce it against a P.R.C. entity, but you will NOT be able to obtain an injunction in a Hong Kong court enforceable in the P.R.C. An injunction differs from a final money judgment. If your business partner breaches a non-compete agreement, and decides to become your competitor, the issuance of a preliminary injunction (in the form of a cease and desist order) could save you invaluable time and money. This is a crucial factor that you must consider when weighing your options.

Another practical consideration is the fact that P.R.C. attorneys practice mainly within the P.R.C. Although not a general rule, most P.R.C. attorneys are more comfortable and proficient with Mainland Chinese civil law. Absent any special requirements or client preference, the default rule is to apply P.R.C. to all contracts. The final decision will likely rest with your own business needs.